Global Metals Trading Hotspot Moves from East to West

6 min read
Metals trading is trending from East to West. Photo: Reuters

While Chinese demand plays a large role in pricing industrial metals at the moment, prices in the near term, especially for commodities like copper, will be driven by the green revolution.

The current bull cycle has occurred mainly due to a strong increase in trading volume in China.

The Shanghai Futures Exchange has seen metal trading volumes explode since China came out of its anti-Covid-19 lockdown in December 2020.

In contrast, trading volume on the London Metal Exchange (LME) – the key setting for the price of metals for the world outside of China – fell 7% last year, and the average daily volume in In the first 6 months of this year, another 13% decrease.

The difference between the Chinese market and the international market reflects the difficult nature of the post-pandemic economic recovery so far.

But things seem to be changing. While policymakers in Beijing are trying to ease the heat from the stimulus fire, in other parts of the world, the recovery has only just begun.

There are signs that physical demand is moving west, and so is trading. Commodity trading volume on the LME in May increased for the first time since March 2020, and continued to increase in June.

The LME exchange is even more hopeful that the wind will change direction as it prepares to launch six new contracts next week. Accordingly, from July 19, LME will announce the plus price of the following items: European aluminum, American aluminum scrap, lithium hydroxide, European hot-rolled steel, Indian steel scrap and Taiwanese steel scrap. (China). LME is the world’s oldest and largest Exchange for Industrial Metals.

The pivot from Shanghai to the West

The Shanghai Exchange (ShFE), which trades metals for China’s domestic market, saw double-digit trading volumes for all major contracts in the first half of the year.

Trading volume on the Shanghai exchange in the first 6 months of this year. Photo: Reuters

However, there has been a clear shift away from the previously “hot” metals like copper and nickel to the non-ferrous metals sector and often less attractive capital markets such as lead, aluminum and tin.

Trading in ShFE futures contracts slowed significantly in the second quarter, with June trading volume at its lowest level since October last year, while cash inflows into futures contracts slowed significantly in the second quarter copper futures at the end of June fell by 18% compared to June 2020.

Trading in new hot-rolled coil (HRC) and stainless steel contracts on the SHFE in the first half of this year recorded unprecedented volume growth, partly a reflection of the speculative trend in the market. local steel market due to government efforts to limit production growth.

The story for the Shanghai aluminum market is similar, with trading volume in May hitting a 13-year high as trading booms. The volume of aluminum contracts traded on the Shanghai exchange in the first half of this year increased 152% compared to the same period last year – when the aluminum market was almost forgotten.

Tin, another neglected metal over the past year, has also seen a comparable increase in speculative activity as tin prices on the Shanghai exchange rose to record highs.

However, the surplus, not the shortage, explains the nearly threefold increase in trading of lead contracts on the Shanghai exchange.

While price action trading (chart analysis) has been overwhelming this year, SHFE’s lead stocks have increased by 87,000 tons to 132,842 tons. That shows that both trading volume and inflows are growing exponentially. At the end of June, the total trading volume was 125,292 lots, 119% higher than 57,141 lots in the same period last year.

Transactions in the West grow again

Trading volume in LME increased due to economic recovery after Covid-19. Photo: Reuters

For metals with strong prices, over the course of several months, trading volume in Shanghai increased dramatically, but not in other places.

Trading volume on the LME dropped continuously in the last 8 months of 2020 and the first quarter, despite the sharp increase in metal prices.

May and June of this year saw the first time that LME trading grew again after more than a year of stagnation. However, only the increase in May and June was not enough to make up for the previous months, so the total trading volume on the LME in the first 6 months continued to decrease.

On the CME (Chicago Goods Exchange), the desertion is similar to copper trading in the LME, when trading volume was almost unchanged throughout the whole of last year and the first quarter of this year, despite more than double the price of copper.

The absence of any clear signs of bullish trading despite the strong price increases on the CME and LME shows that Western investors were not buying the metal, in contrast to Chinese investors.

However, the volume of copper traded on the CME has skyrocketed in the second quarter of this year, coinciding with what happened on the LME.

Competition between Western exchanges

The momentum in copper trading seems to be shifting from East to West in recent months, and both LME and CME expect this trend to continue and spread to other metals, as exchanges This is launching new trading products.

Both the LME and the CME are vying for their share in the steel, aluminum and battery metal markets as the arbitrage on futures contracts widens in all three.

The three new LME steel contracts will cover the Indian and Taiwanese scrap markets as well as the European HRC steel market, bringing the LME iron and steel group to a total of seven contracts.

The CME exchange currently offers 6 contracts of iron products, including iron ore, and is still watching the market reaction to announce mutually beneficial products in the form of arbitrage.

Undoubtedly, the CME exchange has many advantages leading in the race to trade high-end aluminum contracts, while the LME exchange is launching a third contract for European taxable aluminum.

Trading in US Midwest aluminum on the LME (in the form of a spread) in the first 6 months of the year only reached a volume of 871 contracts – 21,775 tons, lower than 960,000 tons compared to the volume traded on CME.

Bringing new aluminium contracts to the LME floor is also difficult to compete with the CME transaction – implemented since 2016, but the new contract for used aluminum on the LME floor will open a whole new door for the metal supply chain to be valued by futures contracts.

The next big competition will also be with battery metal – which is exploding due to environmental policy.

CME’s new cobalt contract, which went public last year, has recorded its best month of performance since June, with sales of 1,344 contracts. In contrast, the physical cobalt contract that LME is trading has been halted due to a three-year consecutive drop in volume, while the spot contract remains untraded.

Undeterred, the LME exchange launched a new lithium trading contract to compete with CME’s new product, which traded only one lot of tokens in May, and no lots were traded for the whole month of June.

In addition, both Western exchanges will consider listing new Chinese lithium contracts, following the launch of the Wuxi Stainless Steel Exchange (Wuxi) last week.

The world of metals trading has become increasingly multipolar, reflecting the rise of China’s futures market over the past decade. But that does not mean that Western exchanges will be overshadowed. Currently, metal trading shows signs of shifting from China to other parts of the world.

Source: – Translated by